cotton stocks to buy: Q2 may be worst quarter for textile firms; Elara prefers these 3 stocks amid gloom

Elara Securities thinks textile companies in India are likely to post their worst second quarter as sales are expected to rise just 4.5% year-on-year. This is because cotton prices are up 23.7% year over year. Volume growth will also remain under pressure as global retailers have resorted to order cuts and there are inventory constraints.

Unfavorable cost structure

The domestic broker said cotton and yarn prices rose over 60% and 23%, respectively, year-on-year in the September quarter of FY23. The brokerage firm also stressed that as Indian cotton is expensive compared to global variants, industry players cannot pass the high cost on to customers across the value chain.

The broker sees pressure in the yarn, fabric, apparel and home furnishings segments, led by lower utilization and an unfavorable cost structure.

Due to high cotton inventories, subdued export demand and unabated input cost inflation, the brokerage firm takes a cautious stance and expects textile companies to report their weakest quarter.

Nonetheless, the broker forecast that the second half of FY23 will be the recovery period for the textile majors as cotton prices ease with new arrivals from October. “Indian cotton’s premium to international prices has narrowed significantly and is likely to turn to a discount again as arrivals pick up the pace. We expect H2FY23 to be a recovery period for India’s textile companies as costs return to reasonable levels and companies become competitive in global markets,” the broker added.

Also, the brokerage firm sees US retailers’ inventories falling with increased efforts from sharp discounts as well as festival sales that are expected to give a boost to Indian demand.

In such an environment, the brokerage firm prefers integrated players within the space that can protect their profitability despite currency headwinds and adverse cotton prices, including

Vardhman Textiles and Arvind.

However, factors to keep an eye on include cotton prices, domestic and foreign demand, investment plans and debt structure.

(Disclaimer: Experts’ recommendations, suggestions, views and opinions are their own. These do not represent the views of Economic Times) cotton stocks to buy: Q2 may be worst quarter for textile firms; Elara prefers these 3 stocks amid gloom

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